Without a doubt, the biggest news in July was the release of US Q2 2020 GDP data. With that now in the rear-view mirror, the next big question for investors is: ‘What comes next?’
Consensus estimates predict a +20.6% jump in US GDP in Q3 2020, followed by a more-or-less flat quarter in Q4 2020. This implies US GDP growth in the second half of the year of +10.7% and total growth of -7% for FY 2020. In 2021, consensus estimates are for US GDP to rise +1%. In other words, economic forecasters and the market are pricing in a “V-shaped” recovery.
The Fed remains committed to supporting the US economy through this recovery, which may be supporting the current “V-shaped” recovery forecasts. The Fed is saying it will keep monetary policy loose, making adjustments as-and-when needed. The Fed is clearly now even more committed to an accommodative stance than it was previously. Politicians are also making supportive noises on the fiscal front – though with less clarity and concreteness than the Fed.
In Europe, the ECB expects an 8.7% drop in GDP in FY 2020. Like US forecasters, the ECB expects a “V-shaped” recovery through H2 2020 into 2021, with FY 2021 GDP increasing +5.2% (we think that looks very optimistic too). There might be some wishful thinking here from the ECB – can Europe really carry that type of momentum forward into 2021? What that might depend on, and what investors and analysts really want to see, is structural change in the European economy. Recent measures have aimed at achieving this change – but it is still far too early to tell whether they will be successful.
The VIX volatility index is also reflecting the “we’re past the worst” mood in economic forecasts, as it continues its long road back down to normal levels. At time of writing, the VIX is almost back to its long-term average of around 20. It would be premature to claim that it’s plain sailing from here, but what is clear is that a corner has been turned in economic data and market confidence.
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